Never Say Die in Detroit

In an ironic twist, amid one of the bleakest economic periods in Detroit's history the city is celebrating the restoration of two landmark hotels downtown that are powerful reminders of its prosperous past. It's a welcome feel-good story for the Motor City, whose auto industry is stuck in reverse with seemingly endless rounds of layoffs.

Following a $200 million renovation, the historic Book Cadillac Hotel, once famous for playing host to U.S. presidents and entertainers, reopened in October under the Westin flag. In mid-December, the Fort Shelby Hotel — named after a British fort that once stood near the site — reopened as a Doubletree Guest Suites as part of a $90 million renovation.

“The comments we get from people when they come down to the Westin is that they couldn't be more proud of it,” says Christopher Ferchill, vice president of development for The Ferchill Group. The Cleveland company spent two years restoring the 453-room hotel, now known as the Westin Book Cadillac Detroit.

Before the Ferchill Group's rescue of the iconic building on Washington Boulevard, the hotel had stood vacant since 1984. Vandals had stolen everything from decorative plaster to brass pieces.

When it was built at a cost of $14 million in 1924, the 33-story hotel was the tallest in the world and contained 1,136 guest rooms. The Italian Renaissance-style exterior was an architectural jewel.

Transformation of the Fort Shelby into 203 spacious guest suites was no less of a Herculean effort. The project took six years to complete from conception to inception, but it was worth the effort, says Richard Curto, a principal with MCP Development LLC, owner and developer of the new Doubletree Guest Suites Fort Shelby. The hotel on Lafayette Boulevard was originally built in 1917 as a 10-story building; a major addition came in 1927.

“The biggest satisfaction by far for our ownership group was to convert a closed-down, dilapidated structure into a beautifully renovated and modern mixed-use development that helped re-energize an area of downtown Detroit and add significant local employment,” says Curto.

More than hospitality

Both hotels are listed on the National Register of Historic Places and anchor mixed-use projects. At the Fort Shelby, 10 floors of luxury, high-end apartments are being built atop the hotel. “There is a deep need in downtown Detroit for higher-end, mixed-use city living where you can rent instead of buy,” says Curto.

MCP is now negotiating leases for the 56 new apartments. Monthly rents range from $1,700 for a one-bedroom apartment up to $4,500 for a penthouse. Finn & Porter, an elegant restaurant that serves steak and seafood, is part of the development along with a local coffee shop.

The Westin Book Cadillac development is a 770,000 sq. ft. mixed-use project that includes 17,000 sq. ft. of retail space on the ground floor as well as 63 condominiums. Michael Symon's Roast (Symon is a star on the Food Network) and 24 grille are among the restaurants that occupy the retail space.

The pace of sales on the condos, which range from the mid-$200,000s to more than $1 million for penthouses, has hit a snag largely because of the credit crunch, says Ferchill. As of late February, the Ferchill Group had closed sales on 15 of the 63 units. “Our pre-sales on the condo were great, but because of people's inability to get financing for these condos, we've had a slow closing period.”

Surge in hotel supply

Eight hotels opened in the Detroit market in 2008, boosting supply by 1,272 rooms, or 3.2%, reports Lodging Econometrics, a global hospitality research firm based in Portsmouth, N.H.

The problem is that demand, as measured in room nights sold, fell 2.1% during the same period, reports Smith Travel Research of Hendersonville, Tenn. The Greektown Casino-Hotel in downtown Detroit opened in February, adding another 400 rooms to the market.

The financial hardship endured by U.S. automakers is unsettling for hotel owners and operators. General Motors lost a staggering $30.9 billion in 2008, forcing the company to accelerate its restructuring efforts. In February, General Motors announced it would cut 10,000 salaried workers worldwide, or 14% of its white-collar employees.

“In our market segment [the upscale segment], we're getting most of the business in downtown Detroit. The issue is everyone is dying down there,” says Ferchill, referring to the struggling local economy and the financially beleaguered auto companies. During the first three months the Westin Book Cadillac was open, Ferchill says, the occupancy ranged from 45% to 55%, which was in line with expectations and the market as a whole.

Indeed, hotel occupancy in the Detroit market ranged from a high of 54.3% in October to a low of 40.2% in December, reports Smith Travel. For the year, occupancy across the market averaged 55.3% compared with 58.3% in 2007.

Ferchill says occupancy at the Westin should reach 65% during March and April, and he remains confident about the hotel's long-term business strategy. “We felt that we could pull a lot of the guests that were staying at some of the [suburban] upper-echelon hotels, such as the Townsend in Birmingham, to downtown.”

The Fort Shelby outperformed the market 15 of 31 days during its first full month of operation in January, according to Shannon Dunavent, the hotel's general manager. January was a particularly soft month across the Detroit market as occupancy averaged just 40.6%, according to Smith Travel. “The market as a whole is targeting around 55% occupancy for 2009,” Dunavent says. “We would like to exceed that goal.”

One advantage that the Westin Book Cadillac and the Fort Shelby both enjoy is that the hotels are located just a few blocks away from Cobo Center, which hosts several trade shows and conventions including the North American International Auto Show each January. The auto show attracted 650,517 people this year, down from 702,814 in January 2008 and below the peak of more than 800,000 in 2003.

The downtown hotel market also should get a bounce this spring when Detroit plays host to college basketball's marquee event, the 2009 NCAA Final Four, slated for April 4-6 at Ford Field. More than 100,000 visitors are expected to pump between $30 million and $50 into the local economy, say local officials.

A boutique feel

At the Fort Shelby, guest suites range from 650 to 1,200 sq. ft., and the average room rate is about $189. By contrast, the average size of a U.S. hotel room is approximately 325 sq. ft. A big selling point with meeting planners is the high-quality educational facilities. The Shelby's 21,000 sq. ft. conference center has earned approval from International Association of Conference Centers (IACC) and operates under strict guidelines.

Meeting rooms are specially engineered with features such as ergonomic chairs, tables with non-glare surfaces, and appropriate lighting and acoustics. A full inventory of audio-visual equipment is available, and technicians are on-site. IACC-approved conference centers are ideal for groups of 25 to 75 people.

“You could have a training meeting here for three or four days, be in a very high-tech educational room, and stay in a two-room suite. It's unlike anything else you're going to see in the city,” says Dunavent. Since its opening Dec. 15, the hotel has hosted conferences for the automotive and pharmaceutical industries.

The hotel's charm is another selling point. The grand staircase and the Crystal Ballroom have been restored, and the terrazzo flooring remains intact. “The developers really put a lot of passion into making this building spectacular, and by doing that it's created a very classic, historic feel,” says Dunavent.

Hilton Hotels Corp., which owns the Doubletree brand, has gone out of its way to hire local Detroiters rather than transfer employees from other cities. While Dunavent says it's personally rewarding, it can make for a difficult training process. “About 50% of our hourly team members have never been in our industry before.”

Displaced autoworkers are among the 100 or so hotel employees at The Shelby. “We've brought them into our building, and trained them how to be in our industry,” says Dunavent. “We took a lot of time and put a lot of heart into making sure we're giving back to the city.”

Capital maze

Financing for the developments reflects the complexity of the projects. The $90 million redevelopment of the Fort Shelby, included several capital sources. Chicago-based ShoreBank provided a $14 million construction loan, while the General Retirement System of the City of Detroit provided a $32 million, first-mortgage loan. Other funding sources included a HUD Section 108 loan for $18.7 million, state historic tax credits, and Michigan single-business tax credits.

John Ferchill, founder of The Ferchill Group, put $8 million of his own money into the $200 million Westin project. The remaining funds came from a patchwork of 22 different capital sources. All totaled, private capital accounted for approximately $103 million, including a $44 million mortgage held by iStar Financial. A combination of tax credits and loans from the city and state also were key to getting the deal done.

“What we learned is that if you get a lot of collaboration from any group such as the city, the state and the county government, and people want to see a project happen, it can get done,” says Christopher Ferchill. “It took us two years from the first time we started talking about financing to get to the closing date.”

How was The Ferchill Group able to achieve its redevelopment vision for the Book Cadillac in light of the fact that so many previous plans to bring the property back to life had fizzled? “I think the majority of it has to do with my father's passion and his ability to never let go once he gets hold of something,” says the younger Ferchill. “He has a never-say-die attitude. I think it speaks volumes about him more than anything else.”

Matt Valley is editor-in-chief.

DETROIT - BY THE NUMBERS

CITY POPULATION

4.4 million

Source: U.S. Census Bureau

UNEMPLOYMENT RATE:

10.6%

Source: Michigan Department of Energy, Labor & Economic Growth

LARGEST PRIVATE EMPLOYERS*

Ford Motor Co.45,000 employees

General Motors Corp.40,142 employees

Chrysler LLC29,205 employees

* as of January 2008 Source: Crain's Detroit Business

METRO AREA VITAL SIGNS

(Note: All rents are effective rents)

Office:

24.6% vacancy, 4Q 2008

21.0% vacancy, 4Q 2007

$15.42 rent per sq. ft., 4Q 2008

$16.22 rent per sq. ft., 4Q 2007

Source: Reis

Multifamily:

6.7% vacancy, 4Q 2008

6.4% vacancy, 4Q 2007

$768 rent per sq. ft., 4Q 2008

$771 rent per sq. ft., 4Q 2007

Source: Reis

Retail:

10.4% vacancy, 4Q 2008

9.4% vacancy, 4Q 2007

$15.70 rent per sq. ft., 4Q 2008

$15.94 rent per sq. ft., 4Q 2007

Source: Reis

Industrial:

12.5% vacancy, 4Q 2008

11.8% vacancy, 4Q 2007

$4.71 rent per sq. ft., 4Q 2008

$4.80 rent per sq. ft., 4Q 2007

Source: Reis

Hotel:

46.5% occupancy, 4Q 2008

52.5% occupancy, 4Q 2007

$81.95 average daily rate, 4Q 2008

$85.10 average daily rate, 4Q 2007

Source: Smith Travel Research

MAJOR PROJECTS

Oakland County: Henry Ford West Bloomfield Hospital, a $360 million, 730,000 sq. ft. facility will open for patients March 15 with 191 beds. Designed to look like a northern Michigan lodge, it is built on 160 acres of woodlands and wetlands. By 2011, the last two patient lodges will be built, raising the total number of beds to 300. All rooms are private. The hospital, which is seeking LEED certification, is attached to a 250,000 sq. ft. medical center.

Developer: Henry Ford Health System

Completion: March 2009

Cost: $360 million

Downtown Detroit: State legislators approved a plan in mid-December to allow for a $288 million, 166,000 sq. ft. expansion of Cobo Center, home of the North American International Auto Show and a host of other trade shows and conferences. The state plan called for the establishment of a regional authority to own and run the facility, but on Feb. 24 the Detroit City Council rejected the idea in a 5-3 vote, leaving the project in limbo.